Rational quantitative trading in efficient markets
Stefano Rossi () and
Katrin Tinn ()
Journal of Economic Theory, 2021, vol. 191, issue C
We present a model where quantitative trading − trading strategies based on the quantitative analysis of prices, volumes, and other asset and market characteristics − is systematically profitable for sophisticated traders whose only source of private information is knowing better than other market participants how many fundamental traders, i.e., traders informed about fundamentals, are active in the market. In equilibrium, the direction of optimal quantitative trading depends on the number of fundamental traders and often switches sign when order flow increases: with few fundamental traders, optimal quantitative trading is trend-following (re. contrarian) after small (re. large) price changes; with many fundamental traders, the opposite holds: it is contrarian (re. trend-following) after small (re. large) price changes.
Keywords: Quantitative trading; Uncertainty about informed trading; Market efficiency; Learning (search for similar items in EconPapers)
JEL-codes: D82 D84 G12 G14 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:191:y:2021:i:c:s0022053120301204
Access Statistics for this article
Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell
More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().